Explain the concept of accrual accounting.

Accrual accounting is based on the principle that financial transactions should be recorded when they are earned or incurred, rather than when cash is actually exchanged. This means that revenues are recognized when a product or service is delivered, and expenses are recognized when they are incurred, regardless of when the cash payments are made.

This system provides a more accurate picture of a company's financial situation by matching revenues with the expenses incurred to generate those revenues within the same accounting period. It aligns with the revenue recognition and matching principles, ensuring that financial statements reflect the true economic activity of a business in a given period.

In contrast, the other options either focus on cash transactions or do not address the timing of earning revenues and incurring expenses appropriately. This distinction is essential for understanding the full scope of a company's financial health and operations.